Civil war over NSW power assets sell-off

NSW Treasurer
Eric Roozendaal
may be forced to ram through the $5.3 billion sale of key electricity assets against concerted opposition from two state-owned energy companies over the sale price.

A last-minute revolt by the boards of Delta Electricity and Eraring Energy threatened to derail the sale process as directors of those companies failed to agree with the government on asset prices.

Delta directors, including former state Olympics minister Michael Knight, were threatening to resign in protest Tuesday night. However, the government was still hopeful it could get a deal done and officially announce the sale on Wednesday.

Mr Roozendaal may have to issue a ministerial directive to the boards in order to secure the required approvals.

The government is selling its biggest retailer, EnergyAustralia, one of its so-called gentrader contracts and three development sites to Hong Kong-owned TRUenergy for just over $2 billion.
Origin Energy
is paying $3.25 billion for two retailers, Country Energy and Integral Energy and a gentrader contract.

AGL Energy
was the surprise loser in the deal, saying yesterday it would invest almost $1 billion in an aggressive campaign to pick up customers from its new rivals. Its share price dropped 78¢ to $15.07. The government is still in negotiations to sell its two remaining gentrader contracts with the most likely buyers, private equity players Blackstone and TPG.

The gentrader contracts give buyers the trading rights to electricity output from the state-owned power stations. Under the privatisation – a wholesale change to the structure of the NSW electricity industry – the government is also selling three retail businesses and seven development sites.

Under the privatisation deal, EnergyAustralia, Country Energy and Integral Energy will see their retail businesses hived off, while their electricity network businesses – the poles and wires – will remain in state hands.

Related Quotes

Company Profile

The state-owned companies met yesterday to give their approval to the deals in what the government was hoping would be a formality. However, it ended up as a stand-off between the companies and Mr Roozendaal.

The directors of both Delta and Eraring conducted their own valuation assessments of the gentrader contracts linked to their businesses – and which are to be sold to Origin and TRUenergy – and they don’t match up with the government’s own estimates. Lawyers from both sides were poring over the details of the deal late last night.

It is believed that the boards of the three retail companies have approved the sale on the terms agreed with the Government.

If the board’s of Eraring and Delta declare the transaction to be “uncommercial’’ Mr Roozendaal can then issue a directive instructing them to approve the deal.

But last night directors were refusing to declare their hand while lawyers reviewed the valuations.

A source close to the transaction said Mr Roozendaal was “extremely disappointed" as the generation companies had had weeks to voice their opposition. The Treasurer was meant to fly to New York yesterday to visit ratings agencies but has postponed his trip and is hoping to leave tomorrow.

Shadow treasurer Mike Baird said: “It is almost beyond belief that these sort of issues come up the day the transaction was meant to be announced."

If the Coalition is elected as expected in the state poll next March, Mr Baird said it would look at all legal avenues to see whether it could reverse the transaction.

“We will consider whether there is an opportunity to undo the transaction," he said.

“This is a long process but we are determined to act in the public interest. They have thrown away billions of dollars and not maximised competition to put downward pressure on prices."

It is understood the board of Delta Electricity was particularly opposed to the deal. There are two gentrader contracts linked to Delta that are being sold but only one of them – Delta Western – is part of the asset sales that have already been decided on.

One industry source said yesterday that “creates a major problem" for Delta, given that the other gentrader, that of Delta’s Central Coast Operations, would be left over.

Given this structure, there are a raft of uncertainties, including how the company might deal with outages. “It creates a significant internal conflict of setting priorities," the source said.

Delta wasn’t immediately available to comment.

The board of one of the retail and distribution businesses signed after a ministerial directive from Roozendaal, a source said.

Another factor in the thinking of the state owned corporations boards’ is future liability. If they are forced to act by a ministerial directive, this can assist their legal position if they are held liable for problems later.

Details of the prices and assets emerged despite widespread confusion on when the government might be able to unveil the deal, Origin thought to be paying a rich price for its retail acquisitions.

Origin is set to pay around $2 billion for the two retail businesses, Country Energy and Integral Energy and $1.25 billion for the Eraring Energy gentrader contract it is picking up in the deal.

TRUenergy is set to pay just more than $2 billion for its assets, a source said. That came after speculation the company was paying $2.1 billion.. A TRUenergy company spokesman declined to comment. Surveying the prices cited on Tuesday, one analyst said he felt TRU had come out better.

“My initial impression is that TRU has got a particularly good deal but Origin has paid a full price," an analyst said.

TRU’s planned purchase of EnergyAustralia means “they’ve got the more attractive asset at what looks to be a more attractive multiple," the analyst said.

Analysts at Merrill Lynch had previously valued Eraring in a range of $909 million to $1.669 million, while they had valued both Delta gentraders together in a range of $1.275 billion to $2.16 billion.

On Merrill Lynch’s valuation of base case and synergies for the retailers, EnergyAustralia was valued at $1.525 billion, Integral Energy was valued at $815 million and Country Energy was valued at $950 million.

Speaking to The Australian Financial Review, AGL managing director Michael Fraser said the company didn’t feel it could see value at the higher prices.

“The issue for us was all about at what price were the assets more value accretive than the alternative strategy."

“The answer is that, with the prices we would have had to pay to buy the assets . . . there was no chance that was a better deal for our shareholders," Mr Fraser said.

One theory on the amount paid by TRU was that it would have expected the other two retailers to go to two bidders, rather than one, and that it could have pitched its acquisition price for the EnergyAustralia on the high side accordingly.

But a source said TRUenergy’s bid didn’t depend on their reading of whether the retailers went to one other company, or two.

“We would have had a clear view on what we felt was the value and that’s what we would have put forward," the source said.

TRUenergy and Origin are expected to face a lot of competition for customers, with AGL out of the process and planning to go on the offensive for organic growth.

Ausbil Dexia chief executive Paul Xiradis said “from here AGL will have to be potentially far more competitive – it is going to be a far more competitive landscape that they deal within".

He said AGL could be “up against it a little bit as competition intensifies", adding that the utility may need to be “more aggressive in gaining market share and there could be a cost in doing so".

“AGL is unlikely to sit back and accept that it doesn’t have a leading role in NSW retail of gas and electricity and clearly will organically grow its presence if it can’t acquire it," said one industry source.

“The cost of organic growth per customer will be considerably less than the cost of what appears to have been the acquisition price per customer," the industry source said.

“The winners might suffer winners’ curse because it’s going to be a lot easier to acquire the customers than it is to retain them," the source said.

As well as AGL, smaller companies like Australian Power & Gas and Snowy Hydro’s Red Energy retail business are likely to challenge Origin and TRUenergy’s positions in NSW retail.

This market is going to be extremely competitive because there’s a few players that are not going to just let TRU and for that matter origin, have it to themselves," the industry source saidThe deal was staffed by a raft of lawyers.

A Mallesons Stephen Jaques’ team led by partners Louis Chiam and Vishal Ahuja is advising TRUenergy. Origin Energy is being advised by Clayton Utz, Minter Ellison acts for AGL Energy, and advising the NSW government is Baker & McKenzie.